Investors were not encouraged to see that the South African inflation rate had risen from 5.9% to 6.1% on the year in September. This frustrated the South African Reserve Bank’s (SARB) attempts to curb inflationary pressure, suggesting that a further interest rate hike could be on the way. With tighter monetary policy failing to get inflation under control, confidence in the domestic economy weakened, prompting the Rand to weaken further across the board.
Speculation over the future of Finance Minister Pravin Gordhan has also continued to have a negative impact on the Rand, with markets nervous of the prospect of a less experienced minister taking over the role. Nevertheless, with Gordhan apparently unfazed by the fraud charges the Rand has been able to shake off some of its political jitters.
The impact of the Brexit vote began to show itself in the UK Consumer Price Index data for September, meanwhile, which demonstrated a sharp uptick in inflationary pressure. As the index rose from 0.6% to 1.0% this raised worries that the domestic standard of living could be increasingly squeezed as the UK prepares to depart the EU. Still higher price pressures are being experienced by importers thanks to the substantial weakening of the Pound in recent months, and this is likely to drive inflation up further.
While this was seen to reduce the likelihood of the Bank of England (BoE) cutting interest rates again before the end of the year, the GBP ZAR exchange rate nevertheless weakened in response.
Rand Boosted as Fed Interest Rates Seen Lower for Longer
UK retail sales fell short of expectations in September, showing a surprise stagnation on the month. This prompted the GBP ZAR exchange rate to trend lower, with weaker consumer spending not seeming to bode well for the domestic economy. Coupled with signs that earnings are likely to be increasingly squeezed thanks to rising inflationary pressure this trend of softer demand could extend over coming months as Brexit uncertainty begins to bite.
With the odds of a December interest rate hike from the Federal Reserve rising in response to hawkish policymaker commentary, the appeal of the Rand dimmed at the start of the week. Commodity prices declined on the back of the strengthened US Dollar, generally weakening risk appetite as investors piled back into safe-haven assets.
However, while an imminent Fed rate move seems increasingly likely, the Rand was able to recover some ground thanks to the more dovish tone of other Fed officials. With interest rates apparently viewed as staying lower for longer, with greater delays between tightening moves, the appeal of higher-yielding currencies was boosted once again.
GBP ZAR Exchange Rate Forecast Lower on UK GDP
While South African data has been limited this week, Thursday’s Producer Price Index results are unlikely to offer particular support to the Rand. Forecasts point towards a continued uptick in producer prices, something that would signal that inflationary pressure is likely to pick up further in the near future. On the other hand, if prices do not demonstrate a further increase then the GBP ZAR exchange rate looks set to remain on a weaker footing.
Confidence in the Pound could deteriorate substantially in response to the third quarter UK GDP report, however. While forecasts have been revised up from earlier predictions of an immediate post-referendum recession, the outlook for the domestic economy is not overly positive. Markets anticipate that growth slowed from 0.7% to 0.3% on the quarter, suggesting that recent uncertainty has had a negative impact on growth.
Another boost for the GBP ZAR exchange rate could come in the form of the third quarter US GDP data. Should growth in the world’s largest economy be found to have strengthened markedly in line with forecasts then risk appetite is likely to decrease dramatically.